On September 22, 2020, the U.S. Department of Labor (DOL) announced a proposed rule simplifying the test to determine whether a worker is considered an “employee” under the Fair Labor Standards Act (FLSA) or an “independent contractor”. In short, the proposed rule uses the “economic reality” test as the basis for whether a worker is an employee or independent contractor. The “economic reality” test considers whether a worker is: 1) in business for him/herself (thus, an independent contractor); or 2) economically dependent on an employer for work (thus, an employee).
The DOL identifies two “core factors” in the analysis: 1) the nature and degree of the worker’s control over the work; and 2) the worker’s opportunity for profit or loss based on initiative and/or investment. These core factors hold the greatest weight in this determination. However, three lower impact factors to consider include: 1) the amount of skill required for the work; 2) the degree of permanence of the working relationship between the worker and the potential employer; and 3) whether the work is part of an integrated unit of production. Nonetheless, the DOL notes that treatment of the worker is more relevant than what is included in the worker’s contract (where applicable).
Employers should keep in mind that the IRS has its own test regarding whether a worker is an independent contractor or employee. Thus, employers should not only analyze the position based on the DOL test but the IRS test as well.